The date for U.S. merchants to start benefiting from preparing early for EMV smart card technology at the point of sale lurks next week. Unfortunately, the future of payments technology won’t come into clearer focus for merchants that quickly.
Visa Inc. established an Oct. 1 effective date for eligible merchants to qualify for the incentive of avoiding the Payment Card Industry compliance validation requirement in any year in which they accept at least 75% of Visa transactions at point-of-sale terminals able to accept EMV smart cards and contactless Near Field Communication payments.
Visa’s incentive program, called the Technology Innovation Program, or TIP, cuts the cost of PCI certification and provides a get-it-done-now boost to merchants who must eventually comply with the April 1, 2013 EMV deadline to have dual-interface terminals in place.
Visa made its U.S. EMV timeline announcement in August of 2011, highlighting an Oct. 1, 2015 liability shift deadline to the party not able to handle EMV payments. Other card brands followed with similar liability-shift deadlines.
With merchants facing a significant number of EMV conversion concerns, the TIP incentive at least illustrates they won’t have to fret over having to choose whether to incorporate NFC technology on their terminals at the same time they invest for EMV.
The card brands and terminal makers have made that decision for them. The card brands clearly want payment terminals to be versatile enough to handle any type of payment, and the terminal makers are issuing new “future-proof” devices that will accept all current payment forms and easily adapt to any new technology.
But merchants still have to pay for these upgrades, and they’d probably like to hear someone tell them that EMV and NFC are going to be the payments technology standard for at least as long as magnetic-stripe cards have enjoyed that status.
“Merchants don’t want to move in one direction and have the issuers and mobile operators move in a different direction,” says Randy Vanderhoof, president of the Smart Card Alliance.
Merchants may view that uncertainty as a reason to put off making payments acceptance decisions until things are more settled, which adds pressure to meeting the EMV timelines, Vanderhoof adds.
Andrew Jeffrey, chartered financial analyst for Atlanta-based SunTrust Robinson Humphrey, says terminal makers have been the only industry players “thinking hard and talking publicly” about the EMV conversion at the point of sale.
“Every new terminal from VeriFone will be EMV and NFC compliant, and Chase Paymentech’s ‘future-proofing’ of terminals with Ingenico is permeating folks’ consciousness on the topic,” Jeffrey says.
Even though every merchant will be required to upgrade through the card brand mandates, some merchants won’t know for sure where they fit in, Jeffrey says.
“Smaller merchants may be more interested in mobile solutions, with a school of thought that says EMV doesn’t matter much to them,” Jeffrey adds. “Their thinking maybe that because they are so small they are not going to get slapped on the hand, and how much fraud risk is there in selling lattes?”
Many merchants would feel more comfortable if they had a better handle on the authentication technology that will take hold with EMV, Jeffrey says.
The security debate about chip-and-PIN vs. chip-and-signature may become moot in the future if new authentication methods such as Square Inc.’s or PayPal Inc.’s geo-location consumer photo identification process gains adoption, he adds.
MasterCard provides incentives to merchants who will offer PIN with EMV smart card acceptance by 2015, saying the issuer, rather than the merchant, will be liable for fraud incidents with chip-and-signature cards.
Still, it remains unclear how EMV authentication will look down the road, Jeffrey says. “It may not be PIN at all,” he adds.
Richard Oglesby, senior analyst and mobile pay expert with Boston-based Aite Group, agrees that many facets of payments technology remain unsettled as they relate to EMV and NFC, but he sees fairly clear lines being drawn.
“Mobile transactions call for different methods and we are seeing digital wallets move to the cloud, so the question becomes where will NFC transactions go?” Oglesby asks.
Industry analysts originally thought NFC transactions would go through the payments systems as a card transaction, similar to EMV transactions, Oglesby says.
“But now it is starting to look like EMV transactions will be through cards, and NFC could be through the cloud or other mobile methods,” he adds.
Either way, merchants have too much to lose by not converting to new terminals, and the sooner the better, especially if they can take advantage of the Visa incentive program early on, Oglesby says.
“Why not buy something ahead of time?” he asks. “These [new] terminals may not have every technology imbedded, but the merchant can add dongles later.”
Merchants should accelerate their terminal replacement plans to easily meet the EMV mandates from the networks, Oglesby says.
Brian Riley, senior research director and analyst with Needham, Mass.-based CEB TowerGroup, believes the fact that Apple Inc. did not include an NFC payment chip in its new iPhone 5 should send warning signals to merchants and acquirers.
“Visa and MasterCard have been pushing their EMV strategy in the U.S. to the forefront, and they are saying the merchant has to be EMV and NFC compliant to pass PCI testing,” Riley says. “At the same time, Apple doesn’t have NFC, and it potentially creates a whole disruption to getting the U.S. accelerated into the move to EMV.”
With the card brands and Apple going in different directions on NFC, it could signal that, over the long haul, the industry may eventually move toward a different payments standard, Riley adds.
In addition, some merchants may view NFC as undermining the conversion to EMV because it calls for an entirely different technology standard that runs on “parallel circuits” to EMV transactions, rather than on the same circuit, Riley says.
But Vanderhoof says most merchants understand that NFC payments and EMV payments represent “parallel changes at the point of sale.”
“Merchants are prepared to make the needed changes for EMV and NFC at one time and do not want to do this in separate stages and disrupt their payments acceptance infrastructure multiple times,” Vanderhoof says.